One of the great puzzles in recent decades has been the persistent slow down in labour productivity across the world, which has been one of the main causes behind below trend economic growth rates globally. The Peterson Institute (PIIE) recently hosted a conference on the subject with a key note address by Larry Summers which provided some fascinating insights into this issue as well as other economic challenges facing the world today. Adam Posen, President of PIIE, provided a recap of the conference which is summarized below:

-Summers’s point on productivity was that the major global trend over the last few decades has been the substantial withdrawal of relatively unskilled workers from the labour force (“dis-employment”). Since 1965, there has been a tripling of the non-employment rate in the US of men between the ages of 24 and 54. This trend has been observed in other countries including China, where there are 20 million less manufacturing workers than there were in 1995.

-The puzzle here is that this phenomenon should have led to rising productivity – as this shift in production has likely happened due to technology as it’s a global trend (and not country specific), with unskilled workers leaving the workforce thereby pushing up the productivity of the remaining workers.

-So either we need a better understanding of the process at work or one of the observed patterns is ill-founded or misleading. According to Posen, the labour market data is more reliable than GDP, as it is a real measure of income generation and tax payments, while GDP is more of a construct. With productivity being measured as the residual of GDP minus capital and labour accumulation, it can provide a misleading picture of the economy.

-According to Summers, productivity numbers are understated today as there have been unmeasured improvements in intangible services ranging from healthcare to travel. Most people would prefer to have current health care at current prices than 1983 health care at 1983 prices, implying that the value people ascribe to health care has increased more than the increase in prices. Since the fraction of these type of services in the economy has been rising, productivity numbers are likely to be understated.

-The implications of substantial underestimation of US productivity are important, with Summers arguing that this implies that inflation is even lower than its currently low level and real interest rates are therefore higher, meaning that current monetary policy is even tighter than what we realize. This is yet another powerful argument against a Fed tightening next month.

-On being questioned about perhaps exaggerating the displacement of workers by technology, Summers made the observation that economists (including him) have long believed that while technology might remove some jobs, because it produces more income it will lead to, over time, more jobs overall. And to believe that jobs would just disappear was being simple-minded.

-However, he noted that if the “simple-minded” non-economists were right, then the world would look a lot like what it actually does today – with wages for unskilled workers displaced by technology going down, fewer employed as a result and labour input being permanently destroyed. Unless the world is able to transform the lower demand for labour into widespread leisure (as imagined by Keynes), with the income redistribution to support it, it could spell disaster for social stability and technological progress.

-Perhaps Summers’s most profound point (based on a forthcoming paper co-written with the former chief economist of the IMF Olivier Blanchard) was that most recessions in the OECD since 1960 have resulted in lower GDP five or ten years afterwards than any pre-recession forecast or trend would have predicted. To quote Summers: “the classic model of cyclical fluctuations, that assume that they take place around the given trend is not the right model to begin the study of the business cycle. And [therefore]…the preoccupation of macroeconomics should be on lower frequency fluctuations that have consequences over long periods of time [that is, recessions and their aftermath].”

-This view is supported by the disappointment with Abenomics in terms of inflation and output, despite pursuing aggressive monetary policies. If the Summers-Blanchard hypothesis is correct, it would require a rethink of the traditional approach to business cycles, trend growth rates and recoveries back to trend and the avoidance of Japan like bad states of the economy at all cost.

–Fascinating stuff, not merely from the perspective of academia, but having real life implications in terms of the future level of real interest rates (which drives prices of all financial assets as well as real estate) and monetary policy. It is great to see Summers back in academia and pondering over these important issues rather than being in government and being forced to toe the party line (i.e. think the economy to be in a better state than it really is – “green shoots”, “economy at lift-off” comments made in the aftermath of the financial crisis).

An EM FX driven Crisis?

-With the bloodbath in many EM currencies during late summer, the market is questioning the ability of EM sovereign balance sheets to withstand a strong dollar given their large foreign currency borrowings. Goldman is out with an interesting take on this noting that you have to look at the whole picture (i.e. assets and liabilities) if you want to understand where EM balance sheets really stand

-The graph below illustrates the level of external debt across EMs, divided into FX and local currency.

-But one also needs to assess the impact on external assets (e.g., FX reserves) when evaluating the credit implications of the sharp FX re-pricing.The asset side of the emerging markets net international investment position (NIIP) is illustrated below:

-The graph illustrates the net external FX position (i.e., external assets minus FX dominated debt), divided into a USD, EUR and ‘other’ component.In Eastern Europe, Romania and Turkey are most vulnerable to generic currency weakness, as their net FX position is negative(in sharp contrast to Russia and especially South Africa), while most Asian and Latin American countries look to be in good shape (besides perhaps Indonesia).

Vegetarian Diets Lower Cholesterol Levels:

-Interesting research published in the American Heart Association (“AHA”) journal on the positive effects of vegetarian diets in reducing cholesterol. As last week’s newsletter noted, high LDL levels directly cause heart disease and preventive measures like diet changes should be actively pursued in addition to medication.

-A vegetarian diet is beneficial for heart health, according to a meta-analysis published in the Journal of the American Heart Association. Researchers reviewed 11 studies on the effects of vegetarian diets on cholesterol levels. Those assigned to a vegetarian diet experienced a significant reduction in total, LDL, and HDL cholesterol, which corresponded with about a 10 percent reduced risk of heart disease. The vegetarian diet was especially beneficial for healthy weight and overweight individuals but less effective for obese individuals, underscoring the importance of early dietary intervention for long-term risk reduction.

This is the first meta-analysis to assess randomized-controlled trials to evaluate the effects of vegetarian diets on blood lipids and points to the efficacy of dietary interventions for hypercholesterolemia (chronic high cholesterol). According to a corresponding editorial, vegetarian diets include high intakes of dietary fiber and health-promoting phytochemicals, low intakes of dietary cholesterol and saturated fats, and complete avoidance of animal products, making it ideal for heart health.